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Answers (ANSW)
Marlin Sams Fund reported holding 450,000 shares (5.7%). Marlin Sams says that it acquired its stake for investment purposes, and may engage in communications with one or more stockholders, management or members of the board about business and financial strategies.

BUSINESS OVERVIEW

Introductory Note

This Annual Report on Form 10-K contains â€śforward looking statementsâ€ť within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on expectations, estimates, goals and projections as of the date of this filing and are subject to significant risks and uncertainties. Actual results may differ materially from those expressed in forward looking statements. See Item 1A of part I â€“ â€śRisk Factors.â€ť

We were incorporated as a Texas corporation in December 1998 and reorganized as a Delaware corporation in April 1999. In October 2005, we changed our name from GuruNet Corporation to Answers Corporation. Our principal executive offices are located in New York, NY. In addition, we have an office in Jerusalem, Israel. We completed our initial public offering in October 2004 and our common stock is listed on the NASDAQ Global Market under the symbol â€śANSW.â€ť

In this Annual Report, â€śAnswers,â€ť â€śwe,â€ť â€śusâ€ť and â€śourâ€ť refer to Answers Corporation and its subsidiary, GuruNet Israel Ltd.

We use various trademarks and trade names in our business, including without limitation â€śAnswers.com TM ,â€ť â€śAnswerTips TM ,â€ť â€śWikiAnswers TM ,â€ť â€ś1-Click Answers TM ,â€ť â€śAnswerRank TM â€ť and â€śBrainboost TM .â€ť This Annual Report also contains trademarks and trade names of other businesses that are the property of their respective holders.

Available Information

We make available free of charge at www.answers.com (in the â€śInvestor Relationsâ€ť section) copies of materials we file with, or furnish to, the Securities and Exchange Commission, or SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

General

We are a leading online answer engine. Our Web properties currently consist of Answers.com and WikiAnswers.com. We offer information related to over 4 million topics based on content from brand-name publishers and our WikiAnswers community. Answers.com combines and presents targeted information from disparate sources and delivers answers to usersâ€™ questions in a single consolidated view. WikiAnswers.com is a user-generated content, or UGC, community-based question and answer site.

According to comScore, a global Internet information provider, our Web properties had approximately 16.67 million unique visitors in February 2008, which ranks Answers Corporation number 53 in the top U.S. Web properties. Our goal is to become the premier online provider of and leading destination for answers to questions.

According to our internal estimates, our Web properties had approximately 480 million page views during the fourth quarter of 2007. During the same period, based on these estimates, approximately 65% of our traffic was generated by search engines; 10% by the definition link appearing on Googleâ€™s website result pages; and 25% from direct traffic, which consists of traffic resulting from a direct type-in of our URL, a bookmarked Favorite, a direct link from other Web properties, a downloaded toolbar, or other software or utilities we make available.

We believe our valuable content and overall user experience drives traffic to our Web properties, which in turn drives advertising revenue. Our revenue is derived primarily from third party ad networks, which aggregate Web properties looking to monetize their Web traffic and advertisers seeking to advertise on the Internet. We expect that direct advertising efforts have the potential for future monetization improvements.

Products & Services

Answers.com

Answers.com, launched in January 2005, aggregates over 4 million topics in categories including health and medical, legal, business and finance, science and technology, history, reference and language from brand-name publishers and other sources. Our technology combines and presents targeted information from disparate sources and delivers answers to usersâ€™ questions in a single consolidated view.

Our content includes over 180 licensed titles from leading offline and online publishers. The publishers we currently license content from include, among many others:

â€˘ All Media Guide;

â€˘ Barronâ€™s Educational Series;

â€˘ Encyclopedia Britannica;

â€˘ Houghton Mifflin Company;

â€˘ Oxford University Press; and

â€˘ Gale.

We attribute the data source of information on each Web page, enabling our users to make an independent evaluation as to the credibility of the content.

WikiAnswers.com

WikiAnswers is a UGC community-based question and answer site where users ask questions and the community answers them. This question and answer site is currently differentiated from other popular question and answer sites which facilitate a forum where users can ask and answer questions, often repeating the same question in many different ways, but cannot improve upon or edit the questions or answers. WikiAnswersâ€™ approach allows the community to transform each question and answer into its own â€świkiâ€ť page, a collaborative page that can be improved upon by others in the community. In this manner, good answers can potentially become better answers over time; related questions can be merged or physically associated with each other; and ultimately, the community user-experience is enhanced.

Content generation is at the core of our business. The dynamics of UGC, is highly scalable. We believe the size of the community drives the quantity of the content, content attracts additional users which in turn grows the community. We believe this cyclical pattern is the major source of growth for WikiAnswers. WikiAnswersâ€™ growth facilitates more growth. We have seen a very high correlation between growth in questions and answers and growth in page views. This is the self reinforcing, self sustaining growth engine driving WikiAnswers. We intend to focus on continuing this trend and enhance WikiAnswers to grow the overall community, which in turn should heavily contribute to the overall growth of the siteâ€™s content and traffic.

Much of the effort of administering WikiAnswers, monitoring its activity and ensuring its steady growth and development is borne by a growing group of external supervisors, the vast majority of whom are not employed by us and not compensated for their efforts. The supervisors are in charge of monitoring questions and answers in specific categories in an effort to ensure questions are being answered timely, prevent vandalism, improve consistency and encourage high-quality contributions. As of December 31, 2007, the community enjoyed the benefit of approximately 200 such supervisors.

WikiAnswersâ€™ growth has accelerated, particularly beginning in mid-April 2007 when we redesigned the site to increase user engagement and contributions. Based on a 29-day average for the month of February 2008 compared to a 30-day average for the month of October 2006, just prior to our acquisition of WikiAnswers, we have seen the following increases in key performance indicators:

â€˘ new users registering with WikiAnswers every day rose from approximately 150 to approximately 2,550;

â€˘ questions answered on a daily basis increased from approximately 300 to approximately 4,650; and

â€˘ daily new questions being added to our system grew from approximately 300 to approximately 9,700.

WikiAnswers is our primary growth driver. We estimate that in the second half of 2008 WikiAnswers will exceed Answers.com in both traffic and revenue. The dramatic growth of WikiAnswers in 2007, coupled by a Google algorithm change that negatively affected Answers.com are the primary contributors to this shift. We are investing heavily in infrastructure and features to support WikiAnswersâ€™ growth and anticipate that the disparate growth rates of WikiAnswers and Answers.com will become ever more apparent during 2008.

1-Click Answers and AnswerTips

1-Click Answers is a tool that facilitates access to Answers.com. With 1-Click Answers installed on a computer, a user can click on a word or phrase within virtually any application, such as an e-mail, spreadsheet, document or database, and gain access to Answers.comâ€™s online library. Answers.com content related to the word or phrase is displayed in an AnswerTips pop-up information bubble. The AnswerTips feature was incorporated into the release of 1-Click Answers 2.0 in May 2006, and represents the next generation of 1-Click functionality, providing information on any word or term without launching a new browser window.

Available for users of both Microsoft Windows and Appleâ€™s Macintosh OS X, 1-Click Answers performs contextual analysis of the words or phrase clicked. For example, when clicking on the word â€śFordâ€ť appearing in the context of Ford Motor Company, Harrison Ford, or Gerald Ford, 1-Click Answers will process and recognize the context and deliver information on the vehicle manufacturer, the film star, or the U.S. president, respectively. In Windows, 1-Click Answers also includes a toolbar for query lookup while using Internet Explorer as well as a docked AnswerBar utility. At the end of 2006, 1-Click Answers was added to Microsoftâ€™s list of recommended add-ons for the Internet Explorer 7 Web browser.

Web-Based AnswerTips

In mid-February 2007, we began offering other Web properties and blogs the ability to provide their users with the 1-Click functionality through our webmaster tool version of AnswerTips, which does not require a download. The Web version of AnswerTips is triggered when a visitor double-clicks a word or phrase on an â€śAnswerTips-enabledâ€ť site.

Answers from the Web

We own a proprietary natural language search technology, which we refer to as Answers from the Web. Answers from the Web extends Answers.comâ€™s abilities beyond our established strengths of integrated encyclopedias, dictionaries, thesauri and almanacs by allowing a user to obtain answers from the Internet to intuitive and succinct English-language questions. Answers from the Web scours digital content on the web and then ranks candidate answers heuristically, based on its proprietary AnswerRank technology, and displays the most likely results.

Traffic Generation

Our revenues are primarily driven by the traffic generated by our Web properties and our ability to effectively monetize that traffic. Our traffic is primarily generated from free sources. In our Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations prior to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2007, we reported RPM based on website queries, or traffic, directly to one of our Answers.com topic pages. Beginning with the Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations contained in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2007, we refer to RPM based on page views, or traffic directly to Answers.com including visits to the home page, excluding lookup conducted through 1-Click Answers, AnswerTips and traffic from partners who pay us for providing them our answer-based services. Page views are the more widely recognized industry standard traffic metric. Based upon our internal analysis, we estimate the number of Answers.com page views to be approximately 13% higher than the number of Answers.com queries. This difference is primarily the result of home page visits in the page view traffic estimates. Historical Answers.com RPM in this Annual Report have been modified to conform to the new methodology and are approximately 13% lower than amounts reported prior to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2007.

Search engines . Our largest source of traffic is search engines, which represented 65% of our traffic for December 2007. We continually seek to improve the volume and optimize the monetization of traffic directed to our Web properties by search engines. The industry commonly refers to these efforts as search engine optimization, or SEO. One of our principle strategic initiatives is centered on our understanding that content drives traffic through SEO. We believe that rich, unique content is valued by the user and by the search engines and their content indexing algorithms. Thus, we have historically focused on adding unique content that has not been broadly offered on the Web. Currently, the Q&A-oriented content belonging to WikiAnswers is playing a growing role in creating rich and unique information. Our additional SEO efforts involve optimizing our Web propertiesâ€™ coding, presentation and structure, such as incorporating a clear hierarchical site-structure, and structuring the site to facilitate search engine indexing.

In July 2007, a search engine algorithm adjustment by Google led to a drop in Google directed traffic to Answers.com. This adjustment reduced our overall traffic by approximately 28% based on the average traffic directed to Answers.com from Google for the week prior to the adjustment as compared to the week after. As a result, our revenue also declined proportionately. We have not been able to reverse the impact of this adjustment, and we do not anticipate that we will recover the lost traffic and revenue. In response to the Google algorithm adjustment, we reduced our headcount and related compensation costs, reducing our base payroll expenses by approximately 12%. In September 2007, Yahoo! dropped our content from its search index, which reduced our Yahoo! directed traffic. This action was reversed within a week, and we have recovered all of our Yahoo! directed traffic.

Google definition link. We have an informal, non-contractual relationship with Google, under which Google links to search results related to certain definitional queries to Answers.com.

Direct users. Answers.com also receives traffic from users visiting and returning to our home page directly, through partnering with other Web properties, or via 1-Click Answers and AnswerTips as well as other software and utilities. AnswerTips, implemented on a blog or site simply by adding several lines of Javascript on a Web page, enables readers to click on a word or words to produce an information bubble that offers definitions, biographies, historical background, maps and countless other types of relevant information on any word or phrase clicked. Marketing the feature to sites and blogs has the potential of increasing the visibility of the Answers.com brand and attracting users to our Web properties.

Traffic Monetization

Our business runs on the ability to effectively attract and monetize traffic. Our primary revenue model for monetizing query traffic on our Web properties is advertising derived from the following sources:

Third Party Ad Networks. In 2007, we obtained the bulk of our advertisements through third party ad networks. Third party ad networks generally compensate us by paying us a portion of the revenue they earn from advertisers for our provision of promotional space on our Web properties. Of these current third party ad networks, Google accounted for approximately 64% of our revenues for 2007 and Shopping.com accounted for approximately 9% during the same time period.

Direct Ad Sales. In order to expand upon our existing sources of advertising revenue, we expanded our advertising efforts to direct ad sales by marketing our Web properties to advertisers. In the fourth quarter of 2006 we began marketing directly to advertisers. As of the end of the fourth quarter of 2007, our sales team consisted of our Vice President of Advertising Sales, two sales persons and a sales account manager based out of our New York office, supplemented by a sales person based in the Los Angeles-area. By demonstrating the buying power of the millions of people who use our Web properties each month, we expect increased advertising directly from agencies, online media buyers and various other advertisers. While our direct advertising efforts have the potential to be a driver of future monetization improvements, the results of our direct ad sales team have not reached desired levels.

The WikiAnswers community is a source of continuous content creation. We believe the size of the community drives the quantity of the content, content attracts additional users which in turn grows the community. We believe this cyclical pattern is the major source of growth for WikiAnswers. We intend to accelerate this growth by further enhancing WikiAnswers, incorporating new features to maximize user experience and promoting the unique nature of this Q&A platform. We also intend to promote the community through more public relations efforts and marketing programs. We have also dedicated resources to fostering the supervisor community who is in great part responsible for the upkeep of the site and the quality of the repository of questions and answers being accumulated.

Expand Content

Content is critical to the success of our business. We plan to continue to offer users relevant, unique content, which is valued by the user and recognized by the search engine algorithms. Our content strategy includes adding new, rich and unique content and having our content continually indexed by the search engines.

Improve Traffic Monetization

We strive to improve our traffic monetization rates. In August 2006 we began building our direct sales force and in the fourth quarter of 2006 we began marketing directly to advertisers. In addition, we work with third party ad networks that we believe optimize the average amount of revenue we earn per page view. By demonstrating the buying power of the millions of people who use our Web properties each month, we expect increased advertising directly from agencies, online media buyers and various other advertisers. We believe that our direct advertising has the potential of being a driver of future monetization improvements. On Answers.com, since its launch in January 2005, we have improved our RPM from $1.17 during the first quarter of 2005 to $6.29 for the fourth quarter of 2007. On WikiAnswers, the focus on RPM improvement has begun more recently and we have seen an increase from $5.17 in the third quarter of 2007 to $6.64 for the fourth quarter of 2007.

Enhance the User Experience

We plan to continually enhance the user experience for visitors to our Web properties and further differentiate our Web properties from other online answer engines. We continuously invest in improving these enhancements, which we believe lead to increased user stickiness and user retention.

Strengthen the Answers Brands

We are pursuing a brand development strategy that includes public relations, product features that encourage word-of-mouth sharing, and direct marketing to enhance public awareness of our Web properties. Our branding strategy centers on positioning us as a leading online answer engine, showcasing authoritative content on our rich collection of topics, with a platform for the creation of compelling user-generated content. We believe that building our brand will not only increase traffic to our Web properties directly, but will also encourage search engine visitors to select links to us when our topics appear in search engine results pages. The goal of these marketing efforts is to increase direct traffic to our Web properties, as well as search engine traffic and traffic directed from other sources.

Answers.comâ€™s collection of information related to over 4 million topics is drawn from more than 180 licensed titles from leading publishers, user-generated content from Wikipedia articles, user-generated questions and answers from WikiAnswers; and original articles authored by our editorial team. As shown in the taxonomy table below, our services offer users access to a multitude of categories through the following select content categories.

Content License Agreements

We license content under written agreements with recognized publishers of information. These agreements are generally for fixed periods, mostly ranging from one year and more, renewable by consent of the parties, and entitle us to provide the licensed information to our end users through our services in return for a fixed amount payable over the life of the agreement, either in a lump sum up front or payable over the course of a fixed schedule, either monthly, quarterly or annually.

We also provide content we license at no cost, content publicly available from the Web and content we develop and author independently. We are increasingly looking to license and make available content that is difficult to find elsewhere on the Internet.

Technology

Research and Development

We devote a substantial portion of our resources to developing new products and services, maintaining and enhancing existing products and services, expanding and improving our fundamental technology and strengthening our technological expertise. In fiscal years 2006 and 2007, we spent approximately $5.9 million and $2.9 million, respectively, on research and development of our products and services. Our engineering and production teams are located in our Jerusalem, Israel development facility, with additional production support provided from our office in New York City. We have developed our technology internally, acquired it or licensed it from an outside vendor.

We anticipate that we have the ability to add server capacity and Internet bandwidth as required by our growth in traffic. As our business grows and requires more servers, the economic justification of outsourcing our hosting services to a highly managed hosting provider such as Data Return diminishes. Thus, in 2008, weâ€™ve begun our collocation migration plan and will be migrating our Web properties to collocation facilities and manage the operations with our own dedicated operations staff. This change may be technologically challenging to implement, take time to test and deploy, cause us to incur substantial costs or data loss, and cause users, advertisers, and affiliates to experience delays or interruptions in our service. These changes, delays or interruptions in our service could cause users and advertisers to become dissatisfied with our service and move to competing providers of online services, reducing the traffic on our Web properties and adversely affecting our business and financial results.

Competition

We face formidable competition in every aspect of our business from numerous Web properties, including vertical content publishers, question and answer sites and other companies that seek to connect users with information on the Internet. We operate in the market for Internet products and services, which is highly competitive and characterized by rapid change, converging technologies and increased competition from companies offering information integrated into other products and media properties. Our ability to compete depends on numerous factors, many of which are outside our control. Some of our current and potential competitors, such as Wikipedia, WebMD.com, TheFreeDictionary.com, Yahoo! Answers, Askville, and Answerbag may have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Therefore, they may be able to devote greater resources to the development and promotion of their services than we can to ours. Our competitors may develop products and services that are equal or superior to ours or that achieve greater market acceptance. Many of our competitors offer a wider range of products than we do, which could attract our users to competitive sites and, consequently, result in less traffic to our Web properties and reduced advertising-generated revenues.

Search engines can also be viewed as competitors. When people use search engines as their means of locating information on the Web and if they are not directed by the search engines to our Web properties, we lose traffic. At the same time, search engines are also the major providers of query traffic to our Web properties. When our Web properties rank highly or poorly in their algorithm ranking systems it significantly impacts our traffic. Additionally, search engines have begun putting snippets of useful answers at the top of their pages.

We seek to generate ad revenues through CPC or CPM text or graphical advertising or other advertising. We attract users with our services, which is useful and differentiated enough to generate significant query traffic. Once people are using our answers engine and viewing the topics it presents, we have the opportunity to furnish relevant sponsored links and other forms of advertising. Our ability to compete for ad revenue will greatly depend on the degree of success we will have in increasing the number of users who utilize our services and view our AnswerPages and in our ability to properly segment and sell advertisements on such pages.

Advertising Relationships

We obtain the bulk of our advertising revenue through agreements with third party ad networks. Third party ad networks generally compensate us by paying us a portion of the revenue they earn from ads that appear on our Web properties. Two of our third party ad networks, Google and Shopping.com, accounted for approximately 64% and 9%, respectively, of our total revenue in 2007.

CEO BACKGROUND

Mark A. Tebbe has served as a director since December 1998 and as Vice Chairman and Lead Director since April 2007. Mr. Tebbe currently serves as Chairman of the Companyâ€™s Nominating/Corporate Governance Committee and a member of the Compensation Committee. Since February 2002, Mr. Tebbe has been Chairman of Techra Networks LLC, a technology-oriented consulting firm. From August 1984 to January 2002, Mr. Tebbe served as Chairman of Lante Corporation, a technology consulting firm he founded. Mr. Tebbe is also a board member of SBI Group, Elexos Corp. and Selective Search, Inc. and several non-profit and civic organizations. Mr. Tebbe graduated with a B.S. in Computer Science from the University of Illinois at Urbana/Champaign.

Lawrence S. Kramer has served as a director since May 2005 and currently serves as a member of the Companyâ€™s Financing Committee and Nominating/Corporate Governance Committee. Since November 2006, Mr. Kramer has been an advisor to CBS on interactive matters and a senior advisor to Polaris Venture Partners since July 2007. From March 2005 to November 2006, he served as the first President of CBS Digital Media. From October 1997 to January 2005, Mr. Kramer was the Chairman and CEO of MarketWatch, Inc., a media company he founded. From February 1994 to October 1997, he served as Vice President of News, Sports and Marketing at Data Broadcasting Corporation. In July 2007, Mr. Kramer became a board member of CreditCards.com, Inc., an online credit card marketplace. Mr. Kramer has been awarded a National Press Club Award, Gerald E. Loeb Award and Associated Press Awards for reporting. Mr. Kramer graduated with a B.S. in Journalism and Political Science from Syracuse University and an M.B.A. from Harvard University and has been a Guest Lecturer at the Harvard Business School for 10 years.

Directors continuing in office until the 2010 annual meeting of stockholders.

Robert S. Rosenschein has been Chairman of the Companyâ€™s board and President since he founded Answers Corporation in December 1998. From December 1998 to April 2000 and since May 2001, Mr. Rosenschein has served as the Companyâ€™s Chief Executive Officer. Prior to founding Answers, he was the Chief Executive Officer of Accent Software International Ltd. (formerly Kivun), a company that developed multi-lingual software tools, and from 1988 to 1997 and from 1997 to 1998, he was the Chief Technical Officer. Mr. Rosenschein previously served as a software developer for Data General, American Management Systems, the World Bank and Ashton Tate. Mr. Rosenschein graduated with a B.Sc. in Computer Science from the Massachusetts Institute of Technology and received the Prime Minister of Israelâ€™s Award for Software Achievement in 1997.

Yehuda Sternlicht has served as a director since June 2004 and currently serves as the chairman of our Audit Committee and as a member of our Financing Committee. Since 2004, Mr. Sternlicht has been an independent financial consultant and since 2004, he has been the Chief Financial Officer of NanoVibronix Inc., a medical device company. From 1992 to 2003, he was the Chief Financial Officer of Savient Pharmaceuticals, Inc.. He has also served in several financial and accounting positions in public and private companies and in a large CPA firm. Mr. Sternlicht graduated with a B.A. in Accounting and Economy from The Hebrew University. He is qualified as a Certified Public Accountant in the State of Israel.

Mark B. Segall has served as a director since December 2004 and currently serves as the chairman of the Companyâ€™s Financing Committee and as a member of the Companyâ€™s Audit Committee. Mr. Segall has been the Senior Managing Director of Kidron Corporate Advisors, LLC, a New York based mergers and acquisitions corporate advisory boutique serving emerging growth companies primarily in the technology, consumer goods and financial services sectors, which he founded in 2003. He is also a founder and managing member of Kidronâ€™s private equity fund, Kidron Opportunity Fund I, LLC. From 2001 to 2003, Mr. Segall was the Chief Executive Officer of Investec, Inc., the U.S. investment banking operations of the Investec Group, a South African based specialist bank. From 1996 to 1999, he was a partner at the law firm of Kramer, Levin, Naftalis & Frankel LLP, specializing in cross-border mergers and acquisitions and capital markets activities and between 1991 and 1995 he was an associate at the same firm. Mr. Segall also served as a director of the Escala Group, Inc., a leading auctioneer of memorabilia, from 1999 until June 2007 and currently serves as a director of Integrated Asset Management Corp., an alternative asset management company. Mr. Segall graduated with an A.B. from Colombia University and a J.D. from New York University Law School. Mr. Segall was a designee of Maxim Group LLC pursuant to our initial public offering underwriting agreement.

Edward G. Sim has served as a director since August 1999 and currently serves as the chairman of the Companyâ€™s Compensation Committee and as a member of the Companyâ€™s Audit Committee. Mr. Sim is a member and Managing Director of the Dawntreader Group and Dawntreader Funds, which he co-founded in 1998. From April 1996 to April 1998, he worked on software and technology investments, such as 24/7 Media, at Prospect Street Ventures, a New York-based venture capital firm. From June 1994 to April 1996, Mr. Sim worked with J.P. Morganâ€™s Structured Derivatives Group on the development of a real-time trading application for global asset allocation. Mr. Sim also serves as a director of DeepNines, Inc., netForensics, Inc., Greenplum, and SIPphone, Inc. Mr. Sim graduated with an A.B. in Economics from Harvard University.

Allen Beasley has served as a director since June 2008 and currently serves as a member of the Companyâ€™s Compensation Committee and Nominating/Corporate Governance Committee. Mr. Beasley is a Managing Director of Redpoint Ventures, a Menlo Park-based venture capital firm he joined at its founding in 1999. Mr. Beasley serves on the boards of several private companies. He graduated with an A.B. in Economics from Stanford and an M.B.A. from the Stanford Graduate School of Business.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a leading online answer engine. Our Web properties currently consist of Answers.com and WikiAnswers.com. We offer information related to over 4 million topics based on content from brand-name publishers, our WikiAnswers community and our proprietary natural language search technology, which we refer to as Answers from the Web. Answers.com combines and presents targeted information from disparate sources and delivers answers to usersâ€™ questions in a single consolidated view. WikiAnswers.com is a user-generated content, or UGC, community-based question and answer site. According to comScore, a global Internet information provider, our Web properties had approximately 16.67 million unique visitors in February 2008, which ranks Answers Corporation number 53 in the top U.S. Web properties. Our goal is to become the premier online provider of and leading destination for answers on any topic.

Prior to January 2005, we sold subscriptions to our reference-based product, GuruNet. After the launch of Answers.com in January 2005, we ceased offering new subscriptions to GuruNet. In February 2007, we terminated the GuruNet service.

Termination of Lexico Acquisition

On July 13, 2007, we entered into a Purchase Agreement that we subsequently amended on July 31, 2007 and November 12, 2007, and on January 15, 2008 we entered into an Amended and Restated Purchase Agreement, which we subsequently amended on February 8, 2008, to acquire all of the outstanding limited liability interests of Lexico Publishing Group, LLC for an aggregate purchase price of $100 million in cash, subject to adjustments for closing net working capital. Consummation of the acquisition of Lexico was subject to our ability to secure financing for the acquisition.

On July 17, 2007, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission which was declared effective on August 6, 2007. The registration statement covers up to an aggregate of $140,000,000 of common stock, preferred stock, warrants, debt securities, units or any combination thereof. On January 16, 2008, we filed a prospectus supplement for a proposed public offering which we later amended on February 8, 2008. On February 13, 2008 we canceled our proposed public offering due to unfavorable market conditions..

On March 1, 2008, the members of Lexico terminated the purchase agreement, due to our inability to finance the acquisition. As a result of the termination of the purchase agreement and in accordance therewith, we reimbursed $500,000 of the sellersâ€™ out-of-pocket transaction-related legal and accounting expenses.

Additionally, in connection with the Lexico transaction, on January 15, 2008, we entered into a Securities Purchase Agreement with an institutional investor, or the senior notes investor, for the optional purchase and sale of $8.5 million aggregate principal amount of our senior secured convertible notes due 2010, or the senior secured convertible notes. Our intent was to close the senior secured convertible notes financing in conjunction with our follow-on offering, if we needed such funds to close the Lexico acquisition. Since our purchase agreement with Lexico was terminated, the Securities Purchase Agreement has also terminated and pursuant to the Securities Purchase Agreement we have paid the senior notes investor a termination fee of $425 thousand.

The payments to Lexico and the senior notes investor, aggregating $925,000, will be charged to operations in the first quarter of 2008. Additionally, in connection with the proposed acquisition of Lexico and follow-on offering, we incurred approximately $1,270,000 of costs, which are reflected as deferred costs on our December 31, 2007 balance sheet, for various matters including legal, accounting, banking, consulting and travel. Further, we incurred an additional $455,000 of such costs in the first quarter of 2008. Those additional costs and the aforesaid payments to Lexico and the senior notes investor, which, in aggregate, amount to $2,650,000 will be charged to operations in the first quarter of 2008.

Acquisitions

WikiAnswers

On November 2, 2006, we acquired WikiAnswers and certain other assets for an aggregate of $2.0 million in cash. In connection with the allocation of the purchase price, we recorded goodwill of approximately $437 thousand and intangible assets, with estimated useful lives of three to ten years, of approximately $1,563 thousand. Since the date of the acquisition the revenues and operating expenses of WikiAnswers have been included in our results of operations.

Brainboost

On December 1, 2005, we acquired Brainboost, developer of the Brainboost Answer Engine which we have integrated into our Answers from the Web technology, an artificial intelligence technology enabling natural language search on the Web. As consideration for the acquisition, we paid $4.0 million in cash and issued 439,000 shares of our common stock, valued at approximately $5.6 million at the time of the acquisition. In connection with the allocation of the purchase price, we recorded an intangible asset related to the Brainboost technology, of approximately $5.4 million, with an estimated useful life of six years, and recognized compensation expense of approximately $4.2 million.

Under the terms of the acquisition, 50% and 25% of the shares of common stock were held in escrow for 3 and 6 months after the purchase date, respectively. Release from escrow was contingent upon our continued employment of one of the principals of the general partnership that formerly owned Brainboost. The escrowed shares were deemed to be compensation for services to be performed by the principal of the seller over the six-month period ending May 31, 2006. Because the escrow criteria were met, the shares were released from escrow, as scheduled, on March 1, 2006 and June 1, 2006. As a result, we recorded a compensation expense charge of approximately $4.2 million, which represented the value of these shares, on a straight-line basis, over the requisite six-month employment commitment period.

The stock component of the consideration was subject to a registration rights agreement pursuant to which we agreed that if our registration statement was not effective with the SEC by April 1, 2006, we would pay the sellers a penalty of $100,000 per month, pro-rated daily. Our registration statement was declared effective on June 9, 2006; consequently, we paid the sellers $227 thousand in the second quarter of 2006.

In June 2006, we completed our initial beta integration of the Brainboost technology into Answers.com as Answers from the Web. The Company plans to evaluate further developing this technology through enhancements to its accuracy, range and speed.

Revenue

Traffic

Our revenue is primarily driven by the traffic generated by our Web properties and our ability to effectively monetize that traffic. Our current sources of traffic include the following:

â€˘ Search engines: Users submit queries and algorithm search engines respond by generating a list of Web pages that are likely to offer the most relevant content. When our pages rank high in the algorithmic systems of search engines, our results are more likely to be accessed by users. For the fourth quarter of 2007, according to our internal estimates, this source of traffic represented approximately 65% of our traffic.

â€˘ Googleâ€™s definition link: We have an informal, non-contractual relationship with Google under which Google links search results related to certain definitional queries to Answers.com. For the fourth quarter of 2007, according to our internal estimates, this source of traffic represented approximately 10% of our traffic.

â€˘ Direct users: Users visiting and returning to our home pages, and to a far lesser extent, arriving from Web properties that send us traffic, or via 1-Click Answers and AnswerTips. For the fourth quarter of 2007, according to our internal estimates, direct users represented approximately 25% of our traffic.

Since most of our traffic originates from search engines, we expend considerable resources improving the volume and optimizing the monetization of this traffic. The industry commonly refers to such efforts as search engine optimization, or SEO. Our Web properties have at times experienced decreases in traffic, and consequently decreases in revenue, due to these search engine actions, including recent actions by Google and Yahoo! that are discussed in the 2007 revenue discussion below.

We continuously seek to improve the user experience of visitors to our Web properties, which we believe leads to increased pages per visit, or stickiness, and return visits, or user-retention. We seek to increase stickiness and user-retention by adding new features, enhancing user interfaces and adding new content to our Web properties.

Monetization

Advertising Revenue. We earn most of our revenue from advertising. There are two primary categories of Internet advertising, pay-per-performance, or most commonly cost per click, or CPC, and pay-per-impression, or cost per 1,000 impressions, or CPM. In the pay-for-performance model we earn revenue based on the number of clicks associated with an ad; in the paid-for-impression model we derive revenue from the display of ads. We work with third party ad networks that we believe optimize the average amount of revenue we earn per page view. Third party ad networks generally compensate us by paying us a portion of the revenue they earn from advertisers for our provision of promotional space on our Web properties. Additionally, in the fourth quarter of 2006, we began marketing directly to advertisers and generating direct advertising revenue. While our direct advertising efforts has the potential to be a driver of future monetization improvements, the results of our direct ad sales team have not reached desired levels.

We gauge the effectiveness of our monetization efforts and trends by measuring our RPM. In our Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations prior to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2007, we reported RPM based on website queries, or traffic, directly to one of our Answers.com topic pages. Beginning with the Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations contained in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2007, we refer to RPM based on page views. Page views include traffic directly to the Answers.com home page, but exclude lookups conducted through 1-Click Answers, AnswerTips and traffic from partners who pay us for providing them our answer-based services. Page views are the more widely recognized industry standard traffic metric. Based upon our internal analysis, we estimate the number of Answers.com page views to be approximately 13% higher than the number of our previously reported Answers.com queries. This difference is primarily attributable to home page visits in the page view traffic estimates. Historical RPM in this annual report, have been modified to conform to the new methodology and are approximately 13% lower than amounts reported prior to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2007.

Our Answers.com RPM increased significantly since we launched the Web property, due to the implementation of various optimization methods, including:

â€˘ modifying the user interface;

â€˘ modifying the color, background and placement of ads displayed;

â€˘ modifying the size of ads;

â€˘ changing the number of ads per page;

â€˘ adding or switching third party ad networks;

â€˘ increasing the revenue-share percentage offered by third party ad networks;

â€˘ modifying the types of ads introduced;

â€˘ modifying the content displayed; and

â€˘ introducing direct advertising sales.

We continue to monitor and adjust these, and potentially other, optimization techniques to maximize our RPM. While we plan to continue focusing on optimizing our monetization, utilizing and expanding on many of the techniques we have used in the past, we believe that the primary factor that will improve our web propertiesâ€™ RPM, if any, is selling ads directly through our own sales force. Excluding expected growth in direct ad sales revenue, we anticipate that our RPM will fluctuate around current levels. In the second half of 2006, we hired our Vice President of Advertising Sales. During the second quarter of 2007, we hired three additional salespersons. While our direct advertising efforts has the potential to be a driver of future monetization improvements, the results of our direct ad sales team have not reached desired levels.

Two of our third party ad networks, Google and Shopping.com, accounted for approximately 64% and 9%, respectively, of our total revenue in 2007 and approximately 65% and 14%, respectively, of our total revenue in 2006. In addition to Google and Shopping.com, we utilize the services of other third party ad networks that provide us with ads. Although there are many companies that provide third party ad networks, the loss of Google as a third party ad network could have a material adverse impact on our financial condition, as we may not succeed in receiving terms and ad services as favorable as those provided under our GSA with Google. While the drop in traffic due to the July 2007 Google search engine algorithm adjustment impacted our aggregate advertising revenue, it did not affect our contractual relationship with Google under the GSA.

Licensing Revenue. We also earn revenues from partners that pay us for providing them with our answer-based services that they then use in their own products, via co-branded Web pages. Revenue from these arrangements are based on various formulas, including a percentage of the revenues these parties earn by delivering our services to their users, fees based on the number of user queries and fixed periodic fees.

Subscription Revenue. Prior to December 2003, we sold lifetime subscriptions to GuruNet, generally for $40 per subscription. In December 2003, we decided to alter our pricing model and moved to an annual subscription model, for which we generally charged our subscribers $30 per year. We have not sold subscriptions since our launch of Answers.com in January 2005. As of February 2007, we terminated the GuruNet service. Subscription revenue in periods subsequent to January 2005 reflects the recognition of revenue from subscriptions that we sold prior to our launch of Answers.com in January 2005.

Costs and Expenses

Cost of Revenue

Cost of revenue consists of fees to third party providers of content, Web search service fees, ad serving fees, amortization of the cost of acquired software used in our products, data center costs including depreciation of information technology assets, contractual revenue sharing fees to various Web property operators for visitors directed to our Web properties, or traffic acquisition costs, as well as the compensation, travel and overhead costs relating to personnel who are responsible for content editing and integration, production operations and customer support. As revenue increases, we expect our cost of revenue as a percentage of revenue to decrease, however, we may experience an increase in our cost of revenue as a percentage of revenue, during the transition period, in the first half of 2008, related to our anticipated shift to a co-location facility for hosting our web properties, rather than our current managed hosting facility, since we will need to operate both facilities during the transition period.

Research and Development Expenses

Research and development expenses consist of compensation, travel and overhead costs of personnel conducting research and development of our products and services, and consulting costs. Our research and development team works primarily on projects to improve and enhance user interface, product functionality, disambiguation, scalability and performance. We generally expect that our research and development expenses will decline as a percentage of revenue as we grow our revenue.

Sales and Marketing Expenses

Sales and marketing expenses consist of compensation, travel and overhead costs of sales and marketing and product management personnel, public relations, marketing and market information services, and advertising and promotional costs. We generally expect that our sales and marketing expenses will decline as a percentage of revenue as we grow our revenue.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation, travel and overhead costs for financial, legal and administrative personnel, insurance fees, fees for professional services, including investor relations, legal, accounting and other consulting fees, investment banking fees, amortization of domain names, and other general corporate expenses. Overhead costs consist primarily of rent, telecommunications, utilities and depreciation expenses. We generally expect that our general and administrative expenses will decline as a percentage of revenue as we grow our revenue. However, in the first quarter of 2008, we will be recording a charge of approximately $2.65 million to reflect various costs we incurred in connection with the termination of the acquisition of Lexico and the follow-on offering of securities.

Stock-Based Compensation

New employees typically receive stock option awards within three months of their start date. We also grant additional stock option awards to existing employees and directors, usually once a year. As of January 1, 2006, we adopted SFAS No. 123 (revised 2004), â€ś Share-Based Payments â€ť , or SFAS 123R, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period awards are expected to vest. Prior to January 1, 2006, we accounted for stock-based awards to employees and directors under the intrinsic value method, which followed the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, â€ś Accounting for Stock Issued to Employees â€ť (APB 25). The intrinsic value method of accounting resulted in compensation expense for stock options to employees and directors to the extent option exercise prices were set below the market value of the Companyâ€™s stock on the date of grant. Costs resulting from stock-based compensation are part of our compensation expense and are included in the operating expense categories in our Statement of Operations.

Other Compensation Charges

In connection with our purchase of Brainboost, we issued shares of common stock, valued at approximately $4.2 million, which were deemed to be compensation for services. Accordingly, $4.2 million was charged to compensation expense over the six-month period ending May 31, 2006.

Other expenses consists primarily of foreign currency exchange gains and losses. In 2006, other expenses included a payment of $227 thousand to the sellers of Brainboost as a result of our delay registering with the SEC shares we issued as consideration in the transaction.

Income Tax Expense

Our effective tax rate differs from the statutory federal rate due to differences between income and expense recognition prescribed by income tax regulations and Generally Accepted Accounting Principles. We utilize different methods and useful lives for depreciating and amortizing property, equipment and intangible assets and different methods and timing for calculating and recording stock compensation expense and other accruals. Furthermore, permanent differences arise from certain income and expense items recorded for financial reporting purposes but not recognizable for income tax purposes. In addition, our income tax expense has been adjusted for the effect of state and local taxes and foreign income from our wholly owned subsidiary. Our deferred tax assets are primarily offset by a valuation allowance because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to transpire.

Our Israeli subsidiary had income in 2007, 2006 and 2005, resulting from the services agreement we entered into with such Israeli subsidiary. Pursuant to this agreement, the Israeli subsidiary charges us for research and development services it provides us, plus 12.5%. However, the subsidiary is an â€śapproved enterpriseâ€ť under Israeli law, which means that income arising from the subsidiaryâ€™s approved activities is subject to zero tax under the â€śalternative benefitâ€ť path for a period of ten years. Currently, the subsidiary operates under two separate â€śapproved enterpriseâ€ť plans, ending December 31, 2009 and December 31, 2014, respectively. In the event of distributions by the subsidiary to the parent, the subsidiary would have to pay a 10% corporate tax on the amount distributed, and the recipient would have to pay a 15% tax to be withheld at source on the amounts of such distribution received. At present, we do not plan on having the subsidiary distribute a dividend to Answers Corporation.

Year Ended December 31, 2007, 2006 and 2005

Revenue in 2007 increased $4,366 thousand, or 62%, to $11,395 from $7,029 in 2006. The majority of the increase in our revenue was due to an increase in the Answers.com advertising revenue of $2,694 thousand, which was the result of increases in our Answers.com traffic and, to a lesser extent, monetization rates. Average daily page views for Answers.com in 2007 were approximately 4.5 million compared to approximately 3.4 million in 2006. RPM for Answers.com was $5.75 in 2007, compared to $5.41 in 2006. In addition, advertising revenues in 2007 includes $1,302 thousand generated from WikiAnswers, a website we only acquired in November 2006.

In July 2007, a search engine algorithm adjustment by Google led to a drop in Google directed traffic to Answers.com. This adjustment reduced our overall traffic by approximately 28% based on the average traffic directed to Answers.com from Google for the week prior to the adjustment as compared to the week after. As a result, our revenue also declined proportionately. We have not been able to reverse the impact of this adjustment, and we do not anticipate that we will recover the lost traffic and revenue. In response to the Google algorithm adjustment, we reduced our headcount and related compensation costs, reducing our base payroll expenses by approximately 12%. In September 2007, Yahoo! dropped our content from its search index. This action was reversed within a week, and we have recovered all of our Yahoo! directed traffic.

Approximately $990 thousand and $290 thousand of our advertising revenue in the 2007 and 2006, respectively, resulted from the efforts of our direct ad sales force. We had no direct ad sales during the year ending December 31, 2005.

Subscription revenue in 2007 of $425 thousand resulted from the recognition of revenue from the sale of lifetime subscriptions to our GuruNet service prior to December 2003. As of December 31, 2006, we had approximately $425 thousand of deferred revenue relating to these subscriptions. Prior to 2007, we did not recognize any revenue from the lifetime subscriptions to our GuruNet service because the subscriptions had no defined term. On February 2, 2007, in accordance with our rights under the agreements we entered into with such subscribers, we terminated the GuruNet service and thereby extinguished our service obligations to our subscribers. As a result, we recognized the entire $425 thousand previously deferred, as revenue, in the first quarter of 2007. We had no additional subscription revenue in 2007. Subscription revenue of $25 thousand in 2006 related to fixed-term subscriptions we sold prior to January 2005, as we recognized the revenue from fixed term subscriptions over the lives of such subscriptions.

Revenue in 2006 increased $4,976 thousand, or 242%, to $7,029 thousand, from $2,053 thousand in 2005. The increase in advertising revenue was primarily the result of increases in our Answers.com traffic and monetization rates. Advertising revenue beginning in the fourth quarter of 2006 also included revenue attributable to WikiAnswers. Average daily page views in 2006 were approximately 3.4 million, compared to approximately 1.8 million in 2005. RPM for Answers.com was $5.41 in 2006, compared to $2.63 in 2005.

Subscription revenue in 2006 and 2005 relates to fixed-term GuruNet subscriptions we sold prior to January 2005. The decrease in subscription revenue in 2006 of $147 thousand as compared to 2005 is the result of the termination dates of fixed-term subscriptions, since we recognized the revenue from fixed term subscriptions over the lives of such subscriptions.

Since we purchased WikiAnswers in November 2006, the website has grown dramatically, each quarter, both in terms of traffic and revenue. Conversely, in 2007, and especially beginning the third quarter of 2007, when we experienced a drop in our traffic due to a search engine algorithm adjustment by Google, Answers.comâ€™s quarterly growth has slowed or, at times, declined. In 2008, we expect that Answers.com traffic will grow very moderately, or in fact decline, while we expect WikiAnswers will continue to grow rapidly. In the second half of 2008, we expect that WikiAnswersâ€™ ad revenue will exceed that of Answers.com.

Costs and Expenses

Cost of revenue increased $1,484 thousand, or 44%, to $4,890 in 2007 from $3,406 in 2006. The increase in cost of revenue was due primarily to increases in data center costs of $600 thousand, including depreciation of information technology assets, increases in content licensing costs of $432 thousand, increases in fees we pay to Google for web search and ad serving fees of $180 thousand, and increases in compensation costs of $92 thousand as a result of staffing additions in our production operations and content departments, salary increases and increased stock-based compensation of $32 thousand. Additionally, in 2007 we incurred $114 thousand of amortization expenses relating to intangible assets we purchased in connection with the WikiAnswers acquisition that took place in November 2006, compared to $21 thousand in 2006.

Cost of revenue increased $2,248 thousand, or 194%, to $3,406 thousand in 2006 from $1,158 thousand in 2005. The increase in cost of revenue for 2006 was partially due to certain expenses we incurred in 2006 that we did not experience in the prior year, as well as increases in certain expenses. During 2006, we incurred $893 thousand of expense from the amortization of the Brainboost technology. We did not incur similar costs in 2005. Additionally, in 2006, we incurred $22 thousand of amortization resulting from intangible assets in connection with the acquisition of WikiAnswers, stock-based compensation of $127 thousand as a result of adopting SFAS 123R, and traffic acquisition costs of $68 thousand, all of which we did not incur in 2005. The remaining net increase in cost of revenue was due primarily to increases in compensation costs, excluding stock-based compensation, of $298 thousand during 2006 as a result of staffing additions in production operations, content and customer support, salary increases which took effect in 2006, increases in data center costs, including depreciation of information technology assets, required to manage more Internet traffic of $348 thousand, increases in fees paid to Google for web search services of $45 thousand, increases in content licensing costs of $234 thousand and increases in overhead costs of $110 thousand.

Research and development expenses decreased $2,887 thousand, or 49%, to $2,978 in 2007 from $5,865 in 2006. The decrease in research and development expenses was due primarily to compensation charges of $3.5 million in 2006, resulting from the acquisition of Brainboost. We did not incur any similar charges in 2007. This decrease was partially offset by increases in compensation-related expenses of $486 thousand due to growth in our research and development team and 2007 salary increases.

Research and development expenses increased $3,675 thousand, or 168%, to $5,865 thousand in 2006 from $2,190 thousand in 2005. The increase in research and development expenses was due primarily to compensation charges of approximately $3.5 million resulting from the acquisition of Brainboost in 2006, compared to approximately $700 thousand in 2005. The increase was also due to increases in compensation-related expenses, excluding stock-based compensation, of approximately $688 thousand, due to growth in our research and development team, including the addition of a Director of Natural Language Research, and salary increases in 2006. Finally, as a result of adopting SFAS 123R, stock-based compensation attributable to research and development activities in 2006 increased to $341 thousand compared to $32 thousand in 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three Months and Six Months Ended June 30, 2008 and 2007

Revenue increased $193 thousand, or 7%, to $3,003 thousand for the three months ended June 30, 2008 from $2,810 thousand for the three months ended June 30, 2007.

Answers.com advertising revenue for the three months ended June 30, 2008 decreased $1,066 thousand compared to the three months ended June 30, 2007, mostly due to decreases in traffic. Answers.com average daily page views in the three months ended June 30, 2008 were 2,641,000, a decline of 41% compared to the average daily page views of 4,441,000 in the three months ended June 30, 2007. The Answers.com RPM in the three months ended June 30, 2008 was $6.18, a decline of 2% compared to the RPM of $6.31 in the three months ended June 30, 2007. The decline in traffic is primarily due to the July 2007 Google algorithm change that significantly impacted Answers.com

traffic, reducing our overall traffic by approximately 28% based on the average traffic directed to Answers.com from Google for the week prior to the adjustment as compared to the week after. As a result, our revenue also declined proportionately.

Answers.com advertising revenue for the six months ended June 30, 2008 decreased $2,006 thousand compared to the six months ended June 30, 2007, mostly due to decreases in traffic. Answers.com average daily page views in the six months ended June 30, 2008 were 2,933,000, a decline of 38% compared to the average daily page views of 4,693,000 in the six months ended June 30, 2007. The Answers.com RPM in the six months ended June 30, 2008 was $6.20, a decline of 1% compared to the RPM of $6.27 in the six months ended June 30, 2007. The decline in traffic is primarily due to the July 2007 Google algorithm change that significantly impacted Answers.com traffic, reducing our overall traffic by approximately 28% based on the average traffic directed to Answers.com from Google for the week prior to the adjustment as compared to the week after. As a result, our revenue also declined proportionately.

Since the Google adjustment, we suspended our strategy of licensing new content, and, consequently, we are experiencing declines in Answers.com traffic. Historically, we operated on the premise that adding rich unique content to Answers.com positively impacted the siteâ€™s traffic growth, guided by the principle that rich unique content was not only appreciated by the human user, rather, it was also highly valued by the search engines and their content indexing programs. While Answers.com receives significant SEO traffic to its rich content pages, the Google algorithm change caused us to doubt whether licensing additional content would yield a positive return. In recent months we made certain changes to Answers.com that have led us to believe that adding content may, once again, be a viable way to grow traffic, however, there is no assurance we will succeed in achieving renewed growth for Answers.com.

WikiAnswers.com advertising revenue for the three months ended June 30, 2008 increased $1,323 thousand compared to the three months ended June 30, 2007, due to increases in traffic, and to a lesser extent, due to improvement in RPM. WikiAnswers.com average daily page views in the three months ended June 30, 2008 were 2,318,000, an increase of 427% compared to the average daily page views of 440,000 in the three months ended June 30, 2007. We believe that the dramatic growth that WikiAnswers has experienced since we acquired it, in November 2006, is primarily due to the unique dynamics of the site. As our database of questions and answers grows, we draw new traffic, primarily from SEO, which in turn results in the creation of new questions and answers, or new content, which in turn drives additional growth. This is a self-perpetuating growth model. The WikiAnswers.com RPM during those periods rose from $4.42 to $7.11, primarily due to the inclusion of WikiAnswers under our Google Services Agreement, replacing the standard Adsense agreement that was entered into prior to our acquisition of WikiAnswers.

WikiAnswers.com advertising revenue for the six months ended June 30, 2008 increased $2,392 thousand compared to the six months ended June 30, 2007, due to increases in traffic, and to a lesser extent, due to improvement in RPM. WikiAnswers.com average daily page views in the six months ended June 30, 2008 were 2,101,000, an increase of 473% compared to the average daily page views of 367,000 in the six months ended June 30, 2007. We believe that the dramatic growth that WikiAnswers has experienced since we acquired it, in November 2006, is primarily due to the unique dynamics of the site. As our database of questions and answers grows, we draw new traffic, primarily from SEO, which in turn results in the creation of new questions and answers, or new content, which in turn drives additional growth. This is a self-perpetuating growth model. The WikiAnswers.com RPM during those periods rose from $4.41 to $7.01, primarily due to the inclusion of WikiAnswers under our Google Services Agreement, replacing the standard Adsense agreement that was entered into prior to our acquisition of WikiAnswers.

Approximately $200 thousand and $64 thousand of our advertising revenue in the three months ended June 30, 2008 and 2007, respectively, resulted from the efforts of our direct ad sales force. Approximately $431 thousand and $159 thousand of our advertising revenue in the six months ended June 30, 2008 and 2007, respectively, resulted from the efforts of our direct ad sales force. In an effort to improve monetization, in the fourth quarter of 2006, we began marketing directly to advertisers and generating additional advertising revenue. However, at the end of the second quarter of 2008 we decided to abandon that effort, and by the end of the third quarter of 2008, the direct sales staff will be leaving the Company.

Subscription revenue in the six months ended June 30, 2007 of $425 thousand resulted from the recognition of revenue from the sale of lifetime subscriptions to our GuruNet service prior to December 2003. As of December 31, 2006, we had approximately $425 thousand of deferred revenue relating to these subscriptions. Prior to 2007, we did not recognize any revenue from the lifetime subscriptions to our GuruNet service because the subscriptions had no defined term. On February 2, 2007, in accordance with our rights under the agreements we entered into with such subscribers, we terminated the GuruNet service and thereby extinguished our service obligations to our subscribers. As a result, we recognized the entire $425 thousand previously deferred, as revenue, in the first quarter of 2007. After the launch of Answers.com in January 2005, we ceased offering new subscriptions to GuruNet.

Revenue Trends by Web Property

The following table illustrates the historical trends of our two Web propertiesâ€™ traffic, revenues and RPMs, by quarter, beginning the first quarter of 2007:

Since we purchased WikiAnswers in November 2006, the website has grown significantly, each quarter, both in terms of traffic and revenue. Conversely, in 2007, and especially beginning the third quarter of 2007, when we experienced a drop in our traffic due to a search engine algorithm adjustment by Google, Answers.comâ€™s quarterly traffic and revenue has generally declined. In 2008, we expect that Answers.com traffic will decline, while we expect WikiAnswers traffic to continue to grow significantly.

Costs and Expenses

Cost of revenue increased $96 thousand, or 7%, to $1,416, in the three months ended June 30, 2008 from $1,320 in the three months ended June 30, 2007. The increase in cost of revenue was due primarily to increases in data center costs of $78 thousand, including depreciation of information technology assets, increases in compensation costs of $58 thousand as a result of staffing additions, salary increases and the weak U.S. dollar as compared to the Israel shekel, increases in traffic acquisition costs of $9 thousand, increased travel of $20 thousand, increases in overhead of $19 thousand, and increases in ad serving fees of $9 thousand. The aforesaid increases were partially offset by a reduction in amortization expense. Amortization expense results from intangible assets we purchased in connection with the Brainboost acquisition that took place in December 2005 and the WikiAnswers acquisition that took place in November 2006. The amortization of the Brainboost technology decreased by $89 thousand, since we wrote it off on May 25, 2008. The amortization of the intangible assets related to WikiAnswers decreased by $15 thousand in the three months ended June 30, 2008, since some of the assets we purchased are now fully amortized.

Cost of revenue increased $345 thousand, or 14%, to $2,809, in the six months ended June 30, 2008 from $2,464 in the six months ended June 30, 2008. The increase in cost of revenue was due primarily to increases in data center costs of $156 thousand, including depreciation of information technology assets, increases in compensation costs of $129 thousand as a result of staffing additions, salary increases and the weak U.S. dollar as compared to the Israel shekel, increases in traffic acquisition costs of $22 thousand, increases in ad serving fees of $23 thousand, increases in travel of $22 thousand, increases in content licensing costs of $13 thousand, increases in overhead of $23 thousand, and increases in fees we pay to Google for web search of $10 thousand. Additionally, recruitment fees in the six months ended June 30, 2008 were $29 thousand, where no such expense was incurred in the six months ended June 30, 2007. The aforesaid increases were partially offset by a reduction in amortization expense. Amortization expense results from intangible assets we purchased in connection with the Brainboost acquisition that took place in December 2005 and the WikiAnswers acquisition that took place in November 2006. The amortization of the Brainboost technology decreased by $89 thousand, as it was written off on May 25, 2008. The amortization of the intangible assets related to WikiAnswers decreased by $31 thousand in the six months ended June 30, 2008, since some of the assets we purchased are now fully amortized.

Research and development expenses increased $181 thousand, or 24%, to $929 thousand in the three months ended June 30, 2008 from $748 thousand in the three months ended June 30, 2007. The increase in research and development expenses was due primarily to an increase of $133 thousand in compensation, as a result of staffing additions, salary increases and the weak U.S. dollar as compared to the Israel shekel, and increases in overhead of $34 thousand, also impacted by the weak U.S. dollar as compared to the Israel shekel.

Research and development expenses increased $335 thousand, or 23%, to $1,804 thousand in the six months ended June 30, 2008 from $1,469 thousand in the six months ended June 30, 2007. The increase in research and development expenses was due primarily to an increase of $304 thousand in compensation-related expenses as a result of staffing additions, salary increases and the weak U.S. dollar as compared to the Israel shekel, and increases in overhead of $49 thousand, also impacted by the weak U.S. dollar as compared to the Israel shekel. Those increases were partially offset by a reduction of $22 thousand in outside consulting services.

This call is also being broadcast over the web, and can be accessed from our investor center page at ir.answers.com. A replay of this call will be available at the site shortly after the completion of the call. At the conclusion of our prepared remarks, we will open up the call for your questions.

Before we begin this call, we would like to call your attention to the following forward-looking statements disclaims. Remarks made during the conference call will contain forward-looking statements within the meaning of the Securities Act of 1933, and the Securities and Exchange Act of 1934, as amended.

Such statements maybe indicated by such words as may, will, expect, believe, plan, anticipate or other similar terminology, and include statements regarding the timing and certainty of closing the reported transaction, strategic and financial benefits of the reported transaction, expectations regarding accretion, integration and cost savings and other financial guidance.

Such statements are subject to certain risks and uncertainties, and actual circumstances, events or results may differ materially, from those projected in such forward-looking statements.

For those statements, we claim the protection of the Safe Harbor for forward-looking statements, contained in the Private Securities Litigation Reform Act of 1995.

Important factors that could cause or contribute to differences include, but are not limited to our failure to apply our significantly higher monetization rates to the Lexico traffic, our inability to obtain Google's consent to amend our Google services agreement to include the Lexico Web properties after the acquisition or transfer of Lexico's Google services agreement after the acquisition, our inability to complete the transaction of Lexico as a result of not obtaining the financing for the acquisition or obtaining all necessary approvals and consents, our inability to realize the intended benefits of the acquisition of Lexico.

The fact is that the Lexico acquisition will result in a significant cost to us, and in certain instances, we may be required to pay a termination fee to Lexico if the acquisition is not completed. Our inability to successfully integrate the operations of Lexico, our inability to maintain and grow Lexico's traffic, the effect on our business if the liabilities we assume in the Lexico transactions are greater than expected or if there are unknown liabilities or a potential decline in the price of our common stock from the sale of equities in the market in order to obtain financing for the acquisition.

Our inability to increase the number of persons who use our product, our inability to increase the number of partners who will generate increased traffic on our site or failure to improve the monetization of our products, a change in the algorithms and methods used by Google, the providers of a substantial amount of our search engine traffic and other search engines.

To identify web pages towards which traffic will ultimately be directed or a decision to otherwise restrict the flow of users visiting Answers.com and our other web properties. A decision by Google to discontinue directing traffic to Answers.com for its definition link, the effects of facing liabilities for any content displayed on our Web properties.

Potential claims that we are infringing the intellectual property rights of any kind and other factors discussed from time-to-time in our new releases. Public statements and/or filings with the Securities and Exchange Commission, especially the risk factor section of our annual report on Form 10-KSB filed in March 2007.

Any forward-looking statements set forth in this disclaimer speak only as of the date of this conference call. We do not intend to update any of these forward-looking statements to reflect events or circumstances that occur after the date thereof. The information and Answers' website is not incorporated by reference into this conference call script, and is included as an inactive textual reference only.

In addition, certain statements made on this call are projections, which reflect estimates and assumptions related to the business of Lexico, and our up coming financing. All of which are difficult to predict, and many of which are beyond Lexico's or our control.

Finally, during the course of this conference call, we will be mentioning non-GAAP financial measures. EBITDA or earnings before interest, taxes, depreciation and amortization and EBITDA excluding stock-based compensation per share.

We view non-GAAP financial measure as supplemental data that while not a substitute for GAAP, allows for greater transparency in the review of the company's financial performance, and is useful to investors. Please refer to yesterday's press release, posted on our corporate website at ir.answers.com, for more comprehensive explanation of our use of non-GAAP measure, in connection with the subject matter transaction.

Furthermore, information shared on this call is accurate only as of the date of this call, and we assume no obligation to update such information. With that said, I would like to turn the call over to Bob Rosenschein.
TRANSCRIPT SPONSOR

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Bob Rosenschein

Thank you. Good morning, and welcome to an exciting day in Answers' history. We have entered in to a definitive agreement to buy Lexico Publishing, owners of Dictionary.com, Thesaurus.com and Reference.com, for $100 million in cash. We expect the acquisition to close in the fall of 2007.

This morning we are discussing, what we think will be a transformative acquisition that will redefine and strengthen Answers' Corporation. Answers.com and Dictionary.com are both leaders in the online information publishing market and possess highly complimentary businesses, we look forward to closing the transaction and are very excited about the prospects of the combined company.

But first, we would like to describe the strategic drivers and financial logic of this transaction. There are several compelling strategic elements of our acquisition of Lexico.

According to June 2007 comScore data, Answers' properties that is Answers.com and WikiAnswers ranked 61st in the US, with 13.4 million unique user visitors. The Lexico properties which includes Dictionary.com, Thesaurus.com and Reference.com ranked 74th with 11.5 million, the combined properties would have reached over 22.5 million monthly unique users in June, ranking it as the 28th largest US property. This leap would rank us higher than such well known web properties as ESPN, WebMD, Craigslist, or iVillage.

We believe that the additional sites, the much larger unique user base, and the top 30 site status will provide us greater exposure among a broad group of online media buyers and advertisers and attraction to our direct to ad sales.

The Lexico transaction also helps us to significantly diversify our sources of traffic. As many of you are aware, we received a lions share of our traffic via the major search engines, close to 80% overall. In dramatic contrast, Lexico's properties received only 15% of their traffic from search engine algorithms. In other words, Lexico receives about 85% of its traffic directly from end users visiting their sites including looking at the word dictionary, in search engines.

On a combined basis, we estimate that approximately 70% of our traffic will be sourced directly from end users. We believe that this shift in the mix of our traffic will mitigate a current risk factor associated with potential changes in search engine algorithms.

Before turning to the financial drivers of the transaction first, a quick clarification to our monetization rates or RPM. Traditionally, we have reported RPM based on our queries, meaning traffic directly one of our topic pages. Dictionary.com, on the other hand measures RPM based on page use, which means all web pages including queries, homepages, etcetera. Beginning today, we will start referring to our own RPM based on page views rather than only queries, to bring the methodologies in line. Since our own page views are approximately 13% higher than our queries, mostly our homepage, some of the RPM figures we mentioned in regard to our historical metrics will be somewhat lower.

We now shift to the financial drivers for the transaction. For fiscal 2006 Lexico had $7 million in revenue with $2.9 million in EBITDA, a 41% margin. However this transaction is not just about past revenue and profit. We have invested significantly over the last 2.5 years to build up on monetization expertise. Specifically, we have increased our monetization rate or RPM from approximately $1.5 per thousand page views in the first half of 2005 to approximately $5.60 in Q1 2007. We intend to apply this accumulated expertise to Lexico's web properties.

Here are some of what we believe to be key components of future revenue and profit growth from Lexico. In 2006, Lexico's properties generated approximately three times our roughly 1.5 billion page views or 3.9 billion page views. At the same time, and this is key, Lexico only monetized this traffic at approximately one-third the Q1 $5.60 RPM rate of Answers.com or approximately $1.75. Drilling down even deeper into 2006 numbers, specifically Lexico's RPM on Google AdSense was approximately $0.30. This contrasts with our own Google AdSense RPM in 2006 of approximately $3.70.

This is the biggest area, in which we expect to improve to Lexico's monetization rates. We focus quite a bit of effort on optimizing AdSense on our web properties over the last two and half years and anticipate that we will be able to apply what we have learnt at the Lexico sites. To put this in the perspective, even a modest $1 improvement in Lexico's RPM in 2006, would have resulted in approximately $3.9 million in incremental revenue, above and beyond the $7 million in revenue last year.

Furthermore, because there are minimal costs associated with the incremental revenue, the vast majority of such revenue, would have also increased to $2.9 million in EBITDA, Lexico generated on a standalone basis. This illustrative example of the potential for incremental Lexico revenue and EBITDA is based on Lexico's 2006 traffic and does not even incorporate any future growth in 2007 or 2008 traffic. Lexico's traffic in 2006 by the way, grew 30%ish over 2005.

We believe the price of this transaction is justified for the reasons we have discussed, despite the seemingly high multiple on a 2006 basis. In fact, conservative expectations of traffic growth, along with the potential for modest increases in monetization rates would yield a significant improvement in future Lexico revenue and EBITDA.

Consequently, on a 2008 multiple basis, which we consider the more relevant evaluation metric for this transaction, we expect the acquisition to be accretive for our 2008 EBITDA, excluding stock-based compensation per share.

Along with these financial and strategic benefits, remember there're obviously other potential synergies. For example, we should be able to cross-promote and offer Answers' properties to all our users, whether they begin their session of Answers.com, Dictionary.com or at our rapidly growing WikiAnswers site. This additional reliable stream of information oriented users should help us grow our unique Q&A community.

Lexico, has built several very popular internet brands, and we actually anticipate keeping the sites separate, in order to maximize their potential. I intend to appoint Bruce Smith, as Interim General Manager of the Lexico properties. And he will lead the effort to implement many of the monetization enhancements. We have already identified and executed our plan to maximize the shareholder returns from this transaction.

The acquisition is contingent on financing. Earlier today we filed the Universal Shelf Registration Statement with the SEC, for the sale of up to $140 million of common stock, preferred stock warrants, debt securities units or any combination thereof. Our plan is to use the proceeds from the issuance and sale of securities to fund the Lexico acquisition and related transaction fees. Any additional funds we may choose to raise will be used for general working capital or potential acquisitions.

The registration statement has been filed with the SEC, but has not yet become effective. Securities covered by the registration statement may not be sold nor may orders to buy be accepted prior to the time the registration statement becomes effective.

In conclusion, we are very exited about the future with Lexico. We think the benefits are logical and compelling and feel that the transaction will strengthen our company and position us for greater success. On a personal note, I want to thank the co-founders of Lexico, Brian Kariger and Daniel Fierro for building these great sites. We expect the whole will be much greater than the sum of the parts.